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CURRENT LANDSCAPE OF DIGITAL ASSET TAXATION IN LEGAL SYSTEM
Azamat Ergashev Ergashevich
PhD in Law, Associate Professor of the Private international law department,
Tashkent State University of Law, Uzbekistan
https://doi.org/10.5281/zenodo.15424019
Annotation:
This article describes the specific features of tax law in legal systems, the
basis of taxation of digital properties, specific legal mechanisms in Uzbekistan. In addition, the
problems in the tax system are studied in detail with clear theoretical foundations. Well-
reasoned proposals for solving problems are put forward. The article covers digital
properties, legal concepts related to them, and tax issues.
Key words:
Tax Compliance, NFT taxation, Digital Asset, Trusts and estates, assess FMV,
Internal Revenue Service.
At present, there is significant variation in how jurisdictions classify and tax digital
assets.
1
In the United States, the Internal Revenue Service (IRS) treats cryptocurrencies as
property for federal tax purposes, meaning they are subject to capital gains tax when sold or
exchanged. However, there is ongoing debate about whether certain cryptocurrencies should
be treated more like currencies or commodities for tax purposes. Other countries, like Japan
and Germany, have designated Bitcoin as a form of legal tender or currency, resulting in
different tax implications.
2
The rise of stablecoins, which are typically pegged to fiat currencies like the US dollar,
has added further complications, as some argue they should be taxed like the underlying
currency. The tax status of cryptocurrency "forks" resulting in the creation of new coins is also
murky and inconsistent across jurisdictions.
3
NFTs, which are blockchain-based tokens representing ownership of unique digital
assets, pose additional conundrums. While the IRS has not issued specific guidance on NFTs,
most tax experts believe they would be treated as collectibles based on their similarities to
artwork and other rarities, potentially triggering higher long-term capital gains rates of up to
28%. However, some have suggested NFT taxation should depend on the nature of the
underlying asset, which could be anything from digital art to virtual real estate to music
royalties.
Tokenized versions of traditional assets like stocks, real estate, or commodities add
further wrinkles, as their tax treatment may depend on whether the tokens are structured to
confer actual ownership and control of the underlying assets or merely represent an
investment contract. The popular blockchain game Axie Infinity, which allows players to earn
tokens with real monetary value, illustrates how digital assets are blurring the lines between
play, work, investing and entrepreneurship in ways that confound traditional tax categories.
4
Challenges for Tax Compliance and Enforcement
.
The inherent features of digital
assets create significant challenges for tax compliance and enforcement. The pseudo-
anonymous nature of most cryptocurrency transactions makes it difficult for tax authorities to
trace ownership and identify taxable events. While public blockchain ledgers show the flow of
funds between digital wallets, tying these addresses to real-world identities requires
advanced forensics that tax agencies are still developing.
5
Gaps in third-party reporting
requirements for digital asset transactions, especially peer- to-peer transfers, exacerbate this
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issue.
6
The global, borderless reach of most cryptocurrencies and blockchain networks also
complicates tax enforcement, as funds can be easily moved across jurisdictions to exploit
arbitrage opportunities or avoid compliance. The rise of privacy-focused cryptocurrencies like
Monero and Zcash, which use advanced cryptography to shield transaction details on the
blockchain, poses further obstacles to effective auditing and enforcement.
On the flip side, the immutable and transparent nature of blockchains could eventually
become a powerful tool for streamlining tax compliance and enforcement in the digital asset
space. Andres proposes a blockchain-based tax ecosystem or exchange where digital asset
transactions could be automatically recorded, reported and taxed in real-time based on
predefined rules. However, such a system would require robust international coordination
and the development of digital identity solutions to tie blockchain records to taxpaying
entities.
Even for well-intentioned taxpayers, complying with tax obligations for digital assets can
be onerous and confusing given the lack of clear guidance and the need to manually track
large volumes of micro- transactions across many platforms. The IRS attempted to simplify
reporting by adding a yes-no question about cryptocurrency ownership to the front page of
the Form 1040 tax return starting in 2020. However, some see this as an aggressive over-
reach that underscores the need for greater clarity and specificity in official guidance.
7
Taxation of Inherited Digital Assets.
The inheritance of digital assets upon the owner's
death creates additional complexities and uncertainties from a tax perspective. In the U.S.,
inherited property receives a "stepped-up basis" to its fair market value at the time of the
owner's death, minimizing capital gains taxes for heirs that later sell it. However, it's unclear
whether digital assets like cryptocurrencies or NFTs can qualify for this favorable tax
treatment given their novelty and the lack of IRS guidance specific to inheritances. Valuing
digital assets for estate tax purposes also presents challenges, as their prices are often highly
volatile and may vary significantly across different exchanges.
8
With NFTs, the value is highly
subjective and speculative, as it depends largely on the whims of a niche collectors' market.
The location and accessibility of private keys needed to control digital assets after the
original owner's death is another concern. If heirs or executors cannot access these keys, the
assets may be permanently lost, depriving beneficiaries and tax authorities of any value.
Conversely, lax key management practices by the original owner could enable heirs to inherit
digital assets without any official record, making them virtually untraceable for tax purposes.
Determining the situs or taxable location of digital assets for estate tax purposes is also
difficult, as they exist largely outside of traditional concepts of physical presence or legal
domicile.
9
Cryptocurrencies and NFTs recorded on global blockchain networks arguably have
no physical location at all. This could create opportunities for sophisticated estate planning to
shield digital wealth from taxation by exploiting jurisdictional gaps and ambiguities.
Proposals for a Digital Asset Tax Framework in Uzbekistan.
Establishing a clear,
consistent, and enforceable tax framework for digital assets should be a key priority for
Uzbekistan as it seeks to construct a comprehensive legal regime for digital inheritance. While
the novelty and complexity of the digital asset ecosystem poses challenges, principled reforms
grounded in core tax doctrines could go a long way toward reducing uncertainty and
deterring abuse. The following proposals could form the basis for a digital asset tax
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framework that balances the need for clarity and compliance with the goal of fostering
innovation:
Legal definitions:
Formally define and classify different types of digital assets under
Uzbekistan law, specifying their tax treatment and reporting obligations. Possible categories
could include: (a) cryptocurrencies used primarily as a medium of exchange (taxable similar
to cash/commodities); (b) cryptocurrencies held for speculative investment (property tax
treatment); (c) utility tokens tied to platform/project access and rights (deferred tax until
profits realized); (d) asset-backed tokens (vary between property, equity, debt based on
underlying); (e) NFTs (collectibles); and (f) governance tokens/rights (as equity).
10
Third-party reporting: Implement third-party reporting requirements for digital asset
exchanges, brokers, and other intermediaries on the scale of the U.S. 1099-K rules requiring
annual disclosures of user transactions exceeding $20,000. Reporting should cover relevant
details like type of asset, purchase price, sale price, holding period, and identity of transacting
parties to the extent feasible.
11
Digital identity:
Work with other governments and international bodies to establish a
global standard for tying real-world identities to blockchain wallet addresses while
preserving appropriate privacy and human rights safeguards.
12
Potential solutions include
decentralized identity (DID) protocols and self- sovereign identity (SSI) frameworks that give
users control over their credentials. Regulated digital identity systems could dramatically
streamline tax compliance and enforcement for digital assets.
Taxation of inheritances:
Default to treating inherited digital assets as property eligible
for stepped-up basis to incentivize accurate reporting and smooth the transfer process.
Provide reasonable timeframes and safe harbors for heirs/executors to access digital assets,
assess FMV, and satisfy reporting requirements upon owner's death.
Location/domicile:
Establish clear rules for determining the situs of digital assets for
estate tax purposes, potentially based on factors like the domicile of the owner/trustee or the
jurisdiction where the private keys are held/accessed. Consider special sourcing rules (e.g.
based on number of network nodes) for digital assets that lack clear locational markers.
13
Simplified compliance: Develop a simplified, standardized tax reporting process for
digital assets that consolidates information from multiple wallets and exchanges into a single
annual filing.
14
Work with major platforms to integrate tax documentation directly into their
user interfaces. Enforcement tools: Allocate resources for tax authorities to develop
blockchain analytics and cryptoasset tracing capabilities on par with the evolving
sophistication of digital asset ecosystems. Pursue bilateral and multilateral information-
sharing agreements to combat cross-border tax evasion. Consider bounties or other
incentives for reporting tax-avoiding smart contract structures.
Trusts and estates:
Clarify the tax implications of placing different types of digital assets
in trust structures, including foreign asset reporting obligations. Specify whether and how the
GSTT and related rules will apply to long-term trusts funded with digital assets.
Digital ruble integration:
Explore opportunities to use Uzbekistan's digital ruble project
as a foundation for streamlining tax compliance and reporting for other digital assets.
15
Features like built- in transaction monitoring and programmable money rules could reduce
friction in adhering to tax standards.
Regulatory sandboxes:
Create safe spaces for entrepreneurs and developers to test
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innovative digital asset projects with modified tax requirements under the supervision of
regulators. Use sandboxes to gather data and inform evidence-based policymaking as the
technology evolves. These proposals provide a high-level roadmap for constructing a
balanced, futureproofed tax framework for digital assets as part of Uzbekistan's digital
inheritance reforms. However, their effective implementation will require ongoing dialogue
between policymakers, technical experts, industry stakeholders, and civil society to craft
appropriately tailored details. A phased rollout with built-in flexibilities to accommodate new
developments in the fast-moving digital asset space is also advisable. By proactively
addressing these challenges now, Uzbekistan can cement its position as a pioneer in the
responsible integration of digital assets into its legal and economic infrastructure.
References:
Используемая литература:
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